On August 22, 2006, the "Lesotho Promise" saw the light of day. It was dug out of the Letseng diamond mine in the kingdom of Lesotho. At a weight of 603 carats (121 grams), it is the largest diamond found since the beginning of the twentieth century.
In July 2007, the buyer, the South African Diamond Corporation (SAFDICO), presented the public with the results of their work: a remarkable 26 stones were cut from the raw diamond, the largest a pear shape with a weight of 75 carats, the smallest a 0.55-carat round brilliant. The cut stones together weigh 224 carats and, according to SAFDICO, would fetch over 20 million US dollars. An increase in value of over 60 percent in roughly one year sounds like an asset investment that every investor would like to call his own - and not only in times of the subprime crisis and a turbulent shares market.
Are diamonds the gold of the future?
Since precious metals have partly experienced a massive value increase in recent years, with the share prices of numerous supporting and processing businesses also able to profit, it seems obvious to project a similar fantasy onto diamonds. Investment experts, who tout precious stones as the investment of the coming years, claim that production is now decreasing for the first time in 25 years. It is thus expected that by 2015, two percent fewer diamonds will be produced than today. The reason for this lies on the one hand in their decreasing availability, as is the case with most raw materials, and on the other hand in the increasing worldwide demand, especially in China and India.
Whoever is looking for rapid price increases, however, may be disappointed. Diamond prices are indeed not prone to market-value slides like other raw materials or shares, but the diamond market does have several features that make it unsuitable for private investors because the prices are not set by the free play of supply and demand. Transparency for all market participants, which is one of the fundamental prerequisites for a functional market, does not exist in the world of the diamond trade. Until 2001, the worldwide diamond market was controlled by the Central Selling Organisation (CSO), a cartel founded by the British-South African diamond company De Beers Consolidated Mines. For over 70 years, it made sure that De Beers controlled around 90 percent of the worldwide market and that even the former Soviet Union delivered the full output of its diamond mines to De Beers.
Market control as guarantor of success
The CSO bought up all the raw diamonds worldwide and put as many of them back on the market as was required. An oversupply, according to their thinking, would push down prices, while an overly low supply would result in lost earnings. De Beers thus operated as middle-man and buffer between fluctuating market demand and mining countries, and prevented large price jumps in one or the other direction. After the end of the cartel, the De Beers subsidiary Diamond Trading Company (DTC) has taken over sales and distribution of all the stones produced in the De Beers mines, which amounts to around 40 percent of world production. The buying process continues to run according to the pattern of the CSO days: ten times a year, "sightholders" meet in DTC headquarters in London. This currently involves 93 polishers and traders, who fulfill the DTC's economic, social and ethical criteria for being their "suppliers of choice". The status of sightholder is held only for a limited time; the next review comes up in 2011.
To buy diamonds, each sightholder is led individually into a room where he is given the stones, pre-selected by De Beers, to inspect in a plain cardboard box. The sightholders have no influence over which raw stones they are given, since the mix of color, size and quality in the box is determined by DTC alone based on market analyses. The sightholders can find fault with the purity or color of a stone but they can only bargain about the price when it comes to stones of exceptional quality. One box is on average worth about 500,000 US dollars. Individual sightholders acquire diamonds, per sighting, in value of up to several million US dollars, which must be paid for in cash within two weeks. In 2007, DTC earned around 6.8 billion US dollars in this way and made a profit of 483 million US dollars.
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